FINANCE

Persistent Mortgage-Servicing Problems Continue to Evade Reform

A house under foreclosure that will soon be auctioned in the Spring Valley area in Las Vegas on October 15, 2010. Foreclosures have evolved into a vast industry since the start of the economic crunch as Americans faced massive debts, with the number of mortgage defaults soaring from an annual average of one percent before 2008 to 10 percent today. In 2010, more than three million foreclosures were expected to take place in the United States, figures show, and documentation problems might exist in 80 percent of them. Las Vegas home prices continue to fall as the city continues to be among the worst performers in the Standard & Poor's/Case-Shiller Home Price report which covers the 20 biggest U.S. property markets. In the past year Las Vegas property prices fell 12 percent against the 20-city market average of a of 2.3 percent increase. AFP PHOTO/Mark RALSTON (Photo credit should read MARK RALSTON/AFP/Getty Images)(MARK RALSTON/AFP/Getty Images)

It seems like such a simple problem to solve: Why can’t homeowners on the brink of foreclosure get a straight answer from their lender about whether they can work out a plan to keep their house?

Sure enough, the various prosecutors, regulators, and lawmakers who have tried to tackle the mortgage-servicing industry over the last year have embraced a fairly simple solution in concept. They all want to require servicers to give borrowers a single point of contact for discussing their loans.

And yet, even that basic reform is proving difficult to carry out.

How to define the single-point-of-contact requirement and who it applies to remains a point of contention. Bankers are splitting hairs over whether a single person or a call center should suffice, and community banks don’t even want to agree to that. The difficulty is indicative of officials’ struggles to respond to the paperwork scandal that first rocked the servicing industry nearly a year ago.

State and federal officials have failed to enact uniform servicing standards in the wake of the robo-signing scandal, even as the industry continues to be plagued by problems such as endless accounts of homeowners being told that they are in line for a mortgage modification while being sent notices that they are headed for foreclosure.

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Lawmakers keep dabbling in the issue—the Senate Banking Committee held another hearing on the topic this week—but most policy leaders seem content to wait and see what will come from an effort by state attorneys general and the Justice Department to reach a global settlement with the five largest industry players.

Those negotiations have been bogged down most of the year, and the sense of urgency is slipping.

“It is not any better. The banks are like human beings, they sense weakness,” said Robert Gnaizda, a fair-housing advocate for the Black Economic Council. “All they need is a signal that this is a very high priority. That is what is missing.”

Even a set of enforcement actions—widely panned by consumer groups as too weak—against roughly a dozen large servicers taken by the Office of the Comptroller of the Currency and the Federal Reserve Board back in April have a long way to go until they are implemented.

Those orders told banks to establish a single point of contact for borrowers to improve consistency and accountability and to end the practice of dual tracking borrowers for modifications and foreclosure, among other improvements. But regulators are still reviewing plans from banks that were submitted in July about how they intend to fix their systems, and they are dragging their heels on approving them until the outcome of the AG settlement is clear.

“A single point of contact makes a lot of sense … but until the settlements all get worked out no one is going to want to do any changes at this point because, why bother?” said Anthony Sanders, a real-estate finance professor at George Mason University. “Any change you make will be ‘Aha, so you admit you should not have done it this way.’ ”

Once banks’ plans are approved they will have a year to fully adhere to all of the rules.

“It definitely feels like we have plateaued,” said Janis Bowdler, a housing expert with the National Council of La Raza. The agreement with OCC, she added, “has the banks writing their own servicing plan.”

Waiting on the AG settlement, she said, “feels like we are back to square one.”

An OCC spokesman contends its orders were “strong and comprehensive” and “in no way impede other authorities from taking action.”

Industry advocates are resisting the push for national standards.

Jack Hopkins, the president and chief executive of the CorTrust Bank in Sioux Falls, S.D., who testified before the Banking Committee on Tuesday on behalf of the Independent Community Bankers of America, said he opposes the standards because they would unfairly increase costs on small institutions like his, which he contends has a low delinquency rate because it didn’t sell risky loans.

“They are looking at things that would almost force us to have a call center in order to track all of our contact with borrowers,” Hopkins said.

Alan Kaplinksy, a partner specializing in bank regulation with the law firm Ballard Spahr, said reform is taking so long because bankers cannot keep up with all of the additional demands the housing crisis has put on their servicing units, which were built to process performing loans rather than field questions or assess foreclosure alternatives.

“A lot of banks have been overwhelmed by the sheer volume of contacts that consumers have made with them in the last few years,” Kaplinksy said. “The servicers have not had enough people to deal with the onslaught of contacts that they have been receiving, and it’s taken a while to catch up with everything.”